As coal-fired power stations close down across Europe, unused carbon pollution permits are slowly building up in the EU’s Emissions Trading Scheme, creating a “coal bubble” that could send carbon prices crashing, campaigners warn.

Around 2.22 billion carbon permits will be available on the market by 2030 as a result of the planned coal phase-outs, according to research by Carbon Market Watch, an international NGO specialised in carbon pricing policies.

More than half are expected to come from Germany, which has committed to phasing out coal power by 2038 at the latest.

If nothing is done, EU countries will continue to auction pollution permits for power plants which are no longer in use, creating a “coal bubble” that could send CO2 prices crashing, says Carbon Market Watch.

The price of carbon allowances on the EU ETS currently stands at €26-27 per tonne of CO2 on the back of reforms agreed last year, after years of stagnation below €10. A price above €30 per tonne is considered essential to spur investments in clean technologies.

The Council of the EU has given the final stamp of approval to an update to the European Union’s Emissions Trading System (ETS), which hopes to help the bloc cut emissions by 40% by 2030.

“The EU ETS has just recovered after a decade of irrelevance, but the job for EU policymakers is far from done,” said Gilles Dufrasne, policy officer at Carbon Market Watch.

EU governments can prevent the coal bubble from building up by gradually cancelling unused permits as coal plants are being shut down, says Carbon Market Watch. The European Commission could also play a part by strengthening the Market Stability Reserve (MSR) appended to the EU ETS, and automatically cancel emission allowances held in there for more than five years.

Failing this, the market will be flooded with a surplus, allowing polluters such as airlines and heavy industry to increase their own emissions at a discount rate.

“Pricing pollution is a key tool to phase out coal, which is of utmost importance across the EU,” Dufrasne said. “But it will do nothing more than shift emissions from power plants to airlines and industry unless the re-emerging surplus permits are removed from the market,” he said in a statement.

Latest data shows that the market-based solution alone is not enough to cut carbon pollution from heavy industry in line with the Paris Agreement goals. A new industrial policy mix is needed to ensure Europe is on a pathway to net-zero carbon emissions by 2040, writes Agnese Ruggiero.

[Edited by Zoran Radosavljevic]

EURACTIV's editorial content is independent from the views of our sponsors.

Media is a pillar of democracy – as long as it can function properly. Now more than ever we need unbiased, expert information on how and why the European Union functions. This information should not be behind a paywall, and we remain committed to providing our content for free.

We know our readers value our reporting. We know journalism that covers the EU in a clear, unbiased way is critical to the future of the European Union. And we know your support is critical for ensuring this independent and free journalism.

Don’t take the media sector for granted. It was already fragile before the coronavirus pandemic. And as people can’t meet, media companies have lost a major source of revenue: events. EURACTIV is supported by a mix of revenue streams including sponsorships, online advertising, EU-funded projects, and policy debates. All of these sources of revenue are impacted by the current crisis.

While media struggles, disinformation thrives. We are already seeing fearmongering, fake news about the EU response, and increased threats to freedom of the press.

For more than two decades we have provided free, independent, multilingual reporting on the European Union. We continue to believe in Europe, and we hope you do too.

Your financial support at this critical time will allow our network of newsrooms across Europe to continue their work when Europe needs it most.

There is a problem with this article – the use of the word “market” or “markets” with respect to the EU ETS. The EU ETS is a political football – is was from the start & it remains as such – a monument to the fact that politically mediated “markets” cannot & never will work. Brussels commentators have remarked to me “ah yes Mike – but it was the only mechanism that the politicos were willing to back”.

This is true, the politicos, in the late 1990s were unwilling to consider carbon taxes – which as Dieter Helm in the Uk noted were/are more econometrically efficient. One thus concludes that the politicos then were cowards – hiding behind an EU ETS that never was a market & had close to zero impact on reducing emissions (this is not my view – that of Vattenfall expressed at the time the MSR was announced).

So, here we are, an ETS that is non-market, does not & until the last two years delivered the “price signals” needed with respect to carbon emissions & now it’s back to the future – as coal stations close – the “market” (i.e. politicos) can’t keep up and EUA prices drop.

As Einstein noted: insanity is doing the same thing time after time, failing & expecting a different result next time around. ETS, never worked, never will work – but politicos still love it. Pathetic.

Contribute to our reporting

The need for fast, accurate and balanced information is always important. We value EURACTIV's good, independent journalism and support this initiative

Mella Frewen, Director General of FoodDrinkEurope

EURACTIV plays a vital role in bringing Europe closer to its citizens. EURACTIV has long recognised that the story of Europe has to be told across the continent, and not just in Brussels. We need to support a truly European and informed debate.